Australian Dollar Tipped to Extend Gains by Westpac, Governor Lowe Proves AUD-Supportive at Parliamentary Appearance

The Australian Dollar is expected to keep pushing the British Pound lower by currency analysts at Westpac while Governor Lowe strikes an optimistic tone about Australia's outlook in his appearance before law-makers.

The Pound to Australian Dollar exchange rate trades at 1.7060 at the time of writing as the downturn that started in the week starting 12th September extends further.

There is an increasing chance that GBP/AUD retraces the full extent of the recovery bounce that saw it rise off the 2016 lows towards 1.6721, reached in August.

“We see further downside for GBP/AUD,” say Westpac in a foreign exchange strategy note to clients. 

The authors of the note cite the call on the prospect of further interest rate cuts and increased quantitative easing at the Bank of England being announced in November.

A good portion of the analyst community believe the Bank will cut rates and expand its asset purchase programme once more in November and we would expect GBP to remain under pressure until such a time as further cuts are discounted.

Westpac also point out the ‘fragility’ of Foreign Direct Investment and Merger and Acquisition activity, which are at risk of rapidly declining at any moment from a hard Brexit.  

The Aussie side of the pair has been supported by resilient commodity prices and strong domestic data, although it too has seen weakness due to central bank stimulus and expectations of further rate cuts.

Nevertheless, the Westpac analysts expect the AUD side of the pair to outperform sterling although it could remain in a range initially

The expected sell-off will eventually dragging the pair lower, however, to a target at 1.69.

“Over the next month, we see the pair heading towards the 1.69 level with GBP weighed down and AUD to remain stable,” says the note.

So while further losses are possible it is worth pointing out that the target set out by Westpac remains above the pair's 2016 lows.

Therefore we could interpret this as a signal that while weakness is to be expected this is not the start of a second leg of significant post-referendum selling.

"The downturn in daily momentum and the sharpness of pullbacks to the centre of the range (1.7250 -75) suggests that GBP will continue to range trade. A test of range support in the 1.6725-50 area is likely as the range defining continues, though the July low of 1.7025-40 could provide interim support," say Callow and Song.

Governor Lowe Gives a pro-AUD Appearance Before Parliament

At his first appearance before the House of Representatives Standing Committee on Economics, RBA Governor Lowe appeared more accepting of the current levels of the Australian Dollar which suggests targetting a lower exchange rate is not high on his agenda. 

Lower also said he sees weak wage growth in Australia as being temporary.

Governor Lowe was asked directly whether the cash rate could go to 1% and answered that it is “possible” but emphasised that it was just one scenario and would be a function of overseas developments, the next inflation print, and the labour and housing markets.

The RBA assess that “while mining investment has some way to fall, our estimate is that around three-quarter of the total decline is now behind us” and that if recent increases in commodity prices “were to be sustained then we could look forward to the drag on national income from falling commodity prices coming to an end”.

The non-mining economy is “doing considerably better…business conditions have improved, employment has increased and there are some signs of a modest pick-up in private investment”.

"Today’s comments, recent communication from the Bank, and the changes in the Statement on the Conduct of Monetary policy suggest the Bank is comfortably in a wait-and-see mode (though it’s inflation forecasts suggest that an easing bias remains in place). We continue to see rates on hold at 1.5%," says Jo Masters at ANZ Research.

With no interest rate cuts looming we would assume the AUD will have one less burden to further appreciation, particularly against the soft Pound.